Allen Legal Corporate Law Articles

Drafting contracts from scratch can be a costly and time-consuming exercise. Because of this, many small businesses use standard form documents obtained from the internet or from an acquaintance. However, doing so can be risky as these documents may not be suitable for your particular business. In particular, slight differences in the words and phrases used can significantly alter the effect of the contract.

In the recent case of CSR Limited v Adecco (Australia) Pty Limited [2017] NSWCA 121, the NSW Court of Appeal held Adecco liable for injuries sustained by its truck driver whilst working on CSR’s site. The contract between Adecco and CSR provided that Adecco would indemnify CSR against any claim ‘arising out of or in connection with’ Adecco’s drivers’ work at CSR’s site. Adecco argued, amongst other things, that this indemnity did not apply because the injury was caused by CSR directing the driver to use a defective truck. It argued that the words ‘arising out of or in connection with’ could not encompass a situation where CSR had caused the injury to the driver.

The Court found that the words ‘arising out of’ and ‘in connection with’ were very wide; they captured relationships ranging from ‘direct and immediate to tenuous and remote’. On the other hand, the words ‘caused by’ require a direct causal connection. As such, the words used in the indemnity clause were wide enough to cover events caused by CSR.

The CSR case illustrates the importance of proper drafting in contracts. Whilst the words ‘caused by’ may have a similar meaning as ‘in connection with’ in ordinary parlance, the legal impact of these words can be vastly different. Failing to examine your standard form contract for these terms can lead to dire consequences when these clauses have been improperly drafted or have been drafted to suit someone else’s business. It is important that you seek legal advice on drafting a contract that fits your business’s unique circumstances.

Fashion-tech startup Showpo has recently filed a lawsuit in the Federal Court against a former employee, Melissa Aroutunian, suing her for loss of sale and reputation.

Showpo claims that the former employee downloaded the Showpo database of 306,000 users just prior to leaving the company. Aroutunian left the company disgruntled and went to work for a competitor, Black Swallow, to whom she allegedly gave the client list. The database allegedly contained contact information of clients, contacts, buyers, suppliers, associates, competition entrants, web users and subscribers.

Black Swallow used similar branding and promoted itself as an affiliate of Showpo. Showpo had a record of the client database being downloaded from the IP address of Aroutunian’s home using her login and password.

A similar case

Similarly to Showpo in the case of Leica GeoSystems Pty Ltd v Koudstaal [2014] a former employee left the company and downloaded the entire database of code, while also deleting several thousand files, before going to work for a direct competitor.

The court held that the employee was in breach of:

Section 115 Copyright Act 1968 (Cth), which outlines the legal actions that can be taken for copyright infringement, despite no actual damage being established by Leica.

Section 183 Corporations Act2001 (Cth), which prevents a current or former employee from using their position to improperly gain an unfair advantage or cause detriment to the company.

Express terms in his Employment Contract, which required Koudstaal to diligently and faithfully perform his duties.

His equitable duty of confidence to his employer.

Lessons for startup founders

Startups are often open and collaborative environments, with a small number of employees and flat structures. As a result employees may access to most of the company’s databases and information and be easily able to share passwords and logins with each other. It is important to ensure there are internal controls and processes in place to off board employees when the leave the business.

Consider what level of access you give to your employees as the team grows. And what the proper steps you need to take to ensure theft doesn’t occur – having a court order that a poor former employee has to pay you a large amount of money may not be much help.

Ensure that your employment agreements contain provisions which protect the company’s confidential information during and after the employment of a team member.

The Showpo case is to be held in February. More to come…

If you would like advice on the employment contracts or your company’s internal controls feel free to email Mark Allen (Mark@allenlegal.com.au).

China has a reputation for being difficult to enforce intellectual property rights, particularly for overseas companies entering the market, and has been a deterrent to expand operations to China.

In Australia we use a ‘first to use’ trademark registration system where the applicant must establish use of that trademark before registration will be granted. In China however there is a ‘first to file’ system, where trademark registration is granted to the applicant who files first, regardless of use.

Issues can arise with this system when ‘trademark squatters’ register a trademark of a prominent overseas company who has not yet expanded into the Chinese market, which can result in copycat products and brands.

The recent case involving Michael Jordan’s name has set a powerful precedent, highlighting a shift in the enforcement of intellectual property rights in China.

What happened?

A Chinese company, Qiaodan Sports, registered the Chinese translation of Jordan’s surname as a trademark in 2007 and was used widely amongst their sport clothing range.

In 2012 Jordan sued the Chinese company, claiming that the use of his name on sportswear was misleading to the Chinese market.

The court agreed that the Chinese translation of Jordan’s name was well recognised by Chinese customers and that Qiaodan registered the trademark in order to leverage Jordan’s fame to sell sports merchandise.

However this is only a partial win for Jordan as Qiaodan Sports can still use the Romanised spelling of his name.

Significance for startups

Registering both the Chinese and English translations of the brand are important for your brand in China. You should consider registering the Chinese translation of your company name and if one doesn’t exist, look into creating one, and register both.

Enforcement of intellectual property rights is not an easy process in China. Rights can only be enforced through litigation, which can take years.

If you are planning on expanding into China, you should consider registering a trademark sooner rather than later, as the registration is based on whoever files first.

China has a five year contestation period, making it near impossible to bring an action after this time. It is important to constantly monitor the market to see if similar names to yours emerge.

This case involved an action brought by the Australian Competition and Consumer Commission (ACCC) against Flight Centre Ltd (FC). The ACCC alleged that FC had attempted to induce three airline companies, on whose behalf FC sold airline tickets, to engage in conduct which would have the effect of price fixing and reducing competition within the market for ‘booking and distribution services to customers’. This conduct was prohibited by section 45 of the Trade Practices Act 1974 (Cth) (TPA) that was then in force.

This section provided ‘contracts, arrangements or understandings made in restraint of trade or commerce or that have the purpose or effect of ‘fixing, controlling or maintaining’ the price. The penalty for a contravention of this section of the TPA was a fine up to $250,000, damages for the other party and an injunction. Criminal proceedings were not able to be brought for a contravention of this section.

The TPA has now been superseded by the Competition and Consumer Act 2010 (Cth). Section 45 of the TPA continues in a modified form in Part IV Division 1 of the Competition and Consumer Act.

This decision is relevant for any supplier that sells products or services both directly itself and indirectly through an agent. This case establishes that a supplier and its agent can be competitors in the same market.

What happened?

FC operated a travel agency business.

It sold, among other things, international airline tickets to its customers.

As part of that sales activity it offered a ‘price beat guarantee’ on any international airline tickets advertised. Under this offer FC would undercut any competitor’s price by $1 per person.

In email correspondence FC requested Malaysia Airlines, Emirates and Singapore Airlines (Airlines) to stop selling tickets directly to consumers at a price lower than what FC could sell them for.

FC threatened to stop selling tickets on behalf of the Airlines unless they agreed to its request.

The Australian Competition and Consumer Commission (ACCC) brought an action against FC, as noted earlier.

In the first trial the Federal Court found that FC did compete in a separate market with the Airlines, even though FC was the agent of the Airlines. The Federal Court found FC had sought to induce its competitors not to undercut its prices, and this amounted to induce anti-competitive agreements. The Court ordered FC to pay $11 million in damages.

In an appeal to the Full Federal Court it was found that there was no separate market for booking and distribution services, rather it was the same market in which FC acted as the agent for the Airlines. In this broad market, FC and the Airlines were not in competition with each other.

The ACCC appealed this decision to the High Court.

Outcome

Was FC in competition with each airline?

The court held that FC’s authority under the agency agreement with the airlines allowed them to both decide whether or not to sell their tickets at all and also at what price to sell them.

FC was not constrained to prefer the interests of the airlines over its own and thus competed in the market with the airlines.

Did FC engage in price fixing?

The email correspondence from FC to the airlines to offer a ‘fair price’ was held to be price fixing and was seen as an inducement to reduce competition in the market.

The Decision?

Commonly a supplier (principal) would tell the reseller (agent) at what price to sell the product or service for. This case was slightly unusual as the agent tried to induce the principal to reduce the price.

The HCA held that where an agent exercises their own discretion in the pricing of the principal’s goods or services, and where the agent is not obliged to act in the interest of the principal, the principal and agent can be in competition with each other must act in accordance with the requirements of what was the TPA and now the CCA.

Therefore due to the market and type of agency relationship in this case, FC and the airlines were still found to be being in competition with each other.

ACCC Chairman, Rod Sims, has said in respect of the decision:

“If you or another organisation are selling something to consumers on the basis that if one of you makes a sale, the other one does not, it doesn’t matter what you call yourself – you are competitors”.

Significance for startup?

This is a significant decision in competition and consumer law. The ACCC has previously brought cases similar to this for price fixing (such as ACCC v ANZ) where principals and agents were found to be competitors.

It is the first time the High Court has found where an agent is free to exercise discretion in the pricing of a principal’s goods or services and it is not obliged to act in the best interests of the principal, then the agent can be in competition with its principal.

Startups who have a principal/agent arrangement and are involved in dual distribution channels should take necessary precautions to ensure they are engaging in any anti-competitive behaviour.

While actual behaviour of suppliers and agents will always be able to be challenged if it is anti-competitive, the starting point is to properly formulate the relationship in a written contract and to understand the boundaries when particular behaviour may become anti-competitive.

Recently in QLD an employer was held liable for an injury sustained by one of its workers, after their shift had finished.

This is an important case which a judgement was made affirming an employers’ responsibility and duty of care to look after its employees, even outside the hours of employment.

What happened?

The plaintiff Mr Kerle, worked as a dump truck driver at a mine in Central QLD. He had finished his fourth consecutive twelve hour night shift and was driving home. His home was 430km (5 hour drive) from the mine.

Nearly 300km into his journey Kerle’s vehicle collided with a metal railing on a bridge as he was crossing a highway. His vehicle then collided with a concrete wall at the far end of the bridge.

Kerle sustained serious injuries, most significantly a brain injury. Kerle claimed damages from his employers for his injuries.

The Decision

As the injury was not sustained during work hours or at Kerle’s place of employment his employers argued that their duty of care did not extend to the injuries sustained.

The court disagreed and found that the accident was attributable to Kerle’s fatigue due to the strenuous hours he had to work, which was caused by a breach of duty of care owed by his employers.

The court stated that the fatigue which caused Kerle’s injury was a result of his employers requiring him to work longs consecutively. And the only possible way of reducing those risks was the responsibility of the employer.

Significance to founders of startups?

Startups are typically fast-paced work environments where employees are encouraged to work as much as possible. The pressure and project based work with strict deadlines common for startups means staff work long hours which can result in fatigue.

If one of your staff member suffers injury, even outside of their workplace, due to fatigue sustained by working long hours then you could be held responsible.

While the hours may not be written in a contract or set hours, there is often an implied obligation to stay and finish the job. Founders should be mindful of this and put some procedure in place to make sure staff are safe and not over-worked, to avoid liability.

Under copyright law there may be more than one contributor to a single work, in which copyright subsists. Unless agreed otherwise the joint authors will own the copyright in equal shares.

In addition to copyright, those authors will have moral rights in their work.

Commonly moral rights are seen as an artistic right. They are personal rights (not capable of being transferred) that ensure a creator is properly attributed for the work and that their work will not be treated in a derogatory way even if the copyright in the same material has been transferred to a third party.

This case involved the dispute between a co-contributor of university research and his claim to moral rights in the copyright work.

Facts

The applicant, Dr Li and the respondent Dr Leng, were employed by Edith Cowan University (ECU) in research positions.

Leng and three other professors at ECU worked on a book together and within the book there was a chapter which Li assisted and was named as a co-author of that chapter.

Li claimed that Leng breached sections of the Copyright Act that concerned the moral rights of the authors as he was not attributed as an author of the entire

However Leng refuted this stating there was no evidence to suggest Li collaborated with any of the other authors or contributed to the content of the book, other than his work on the chapter that he was attributed. And therefore had no claim to moral rights as Li contributed to only a portion of the entire work and therefore was not a joint author.

Held

The court defined joint authors as ‘persons who have participated in a substantial way in at least part of the relevant research should be included as an author of a publication from that research.’

Ling was held not to be an author of the work, and any claims based on the moral rights with respect to authorship of the book as a whole were dismissed.

The court held there was no evidence to suggest that Li collaborated with the other three authors or made any ‘substantial contributions’ to the book.

Significance to founders of start-ups?

This is a useful reminder that moral rights are relevant outside the creative space.

As always it is much better if you can think about the issues associated with copyright and moral rights at a time when you can exercise some control over the expectations of those contributing to the creation of materials in which copyright and moral rights subsist.

The time and money spent on this case could have been avoided if there was a discussion and agreement (recorded in writing) as to the contributions made, the ownership and the exercise of moral rights.

Mostly in the commercial context, those with moral rights are expected to consent to any action being taken by the owner of the copyright even if it amounts to an infringement of the moral rights.

While not an issue in this case you must also take care with joint ownership of copyright because each owner does not have the right to independently exploit the copyright without the consent of all other co-creators.

In Australia there is freedom of information legislation that provides public access to information held by public authorities. In NSW the Government Information Public Access Act (2009) provides an enforceable right to access the universities’ information if it is in the public interest.

In this case a veterinary surgeon was requesting information from the University of Sydney, in relation to studies in the area of pet food. This case highlights that in order for the courts to grant access to the information, the applicant must be requesting the information for a proper purpose.

The Facts

This case involves the request by one party (Lonsdale) for access to some of the University of Sydney’s documents. The University had recently published papers on a study of pet food manufacturers and Lonsdale was concerned about the University’s research funding for that study and the commercial relationship between the University and pet food manufacturers.

Lonsdale requested to have access to documents pertaining to the research funding from the University of Sydney. The University of Sydney did provide some of the requested documents to Lonsdale, but did not grant access to all the documents requested.

The Parties

Lonsdale was a veterinary surgeon who and holds the view that the best food is fresh and natural. Part of Lonsdale’s position is that such food is good for the animals jaw, teeth, general health and resilience. Lonsdale also asserts that manufactured pet food is extremely bad for animal’s health arguing it results in a shorter life expectancy, chronic conditions or diseases.

University of Sydney had done research and published papers on pet food manufacturers and alternate types of pet food were contrary to Lonsdale’s views.

The Arguments

Lonsdale sought copies of material relating to the University’s research funding and commercial relationships with the pet food manufacturers. The request was made under the Government Information (Public Access) Act, on the basis that the information was of the public interest.

Under the Act material can be released where there is an overriding public interest against disclosure of the government information for the purposes of this Act if (and only if) “there are public interest considerations against disclosure and, on balance, those considerations outweigh the public interest considerations in favour of disclosure”. Lonsdale argued that under the Act the University of Sydney was obliged to provide the requested materials.

However The University of Sydney argued that the materials requested were not in the public interest, but rather were of professional and commercial interest to Lonsdale, due to his position as a veterinary surgeon and strong opposition of pet food manufacturers.

The Decision

Access to the information was denied on the basis that the court was satisfied that the request had not been made for a proper purpose. The Judge stated that the request for the information by Lonsdale was done for his own personal commercial interests and access to the information would not be granted on that basis. Therefore highlighting the importance of an applicant to be requesting the information for a proper purpose.

This case involved a dispute between restaurant owners over the use of a similar name and trademark.

The applicant (Florinians) since 2009 had an established family run restaurant in Brisbane called ‘Little Greek Tavena’ which had a registered trademark which consisted of a red chilli sitting above the words ‘Little Greek’ and underneath the word ‘Tavena’.

The respondent (PYT) opened a restaurant in Brisbane with the name ‘Little Greek Cuzina’ in June 2015 and had an unregistered trademark which consists of a square Parthenon mark.

The second respondent (Adamaris) has been operating as a Greek restaurant in Brisbane since June 2016 and also used the square Parthenon mark, after being granted a licence from PYT to use the mark.

The Issue

Florinians claimed that PYT and Adamaris were in contravention of the Act by using a name that is substantially identical with, or deceptively similar to, the trade mark in relation to the goods or services in respect of the trade mark which is registered.

When PYT started operating there were many other Greek restaurants in Brisbane, however Florinians was the only one with the words ‘Little Greek’ in the name. Furthermore the phonetic similarity between the names ‘Tavena’ and Çuzina’ was claimed to cause confusion amongst potential customers.

The Claim

Florinians then brought proceedings against PYT and Adamaris for trademark infringement and claimed an account of profits in respect of the infringement. Florinians also claimed additional damages under s126(2) of the Trade Marks Act (1995) and a permanent injunction under s126(1) of the Act, preventing PYT and Adamaris from using the words “Little” or “Greek” in connection with the businesses of restaurants in Australia.

Florinians requested an injunction to prevent the applicants from using their trade mark, claiming it is ‘deceptively similar’ to Florinians registered trade mark. The Florinians also claimed that they had ‘continuously and strenuously’ promoted the registered trade mark, which ‘acquired a reputation’ in Australia

Requirements for the Claim

In order for Florinians claim to be successful against the respondents for trade mark infringement to be successful, they must establish:

The respondent’s trade mark was substantially identical with or deceptively similar to their own.

The respondent’s trade mark is similar enough to cause confusion or deceive.

The respondent’s trade mark was not used in good faith to indicate quality, quantity, intended purpose, value, geographical origin, or some other characteristic of goods or services.

The Outcome

The court found that:

the terms ‘Little’ and ‘Greek’ are not of themselves ‘suggest any characteristic or distinctiveness’; BUT

combining the three words together was a ‘badge of identification of a particular business’; and

use of a similar name was likely to be misleading.

PYT and Adamaris were ordered:

to cease using their trade marks from their restaurants;

to pay Florinian damages for the trade mark infringement.

Takeaways from the Case

This case demonstrates:

the importance of protecting your brand, even if it consists of a combination of ordinary English words – while some protection can be gained through use – it is much easier to establish reputation with a registered mar; and

the value of protecting your brand; and conversely

the costs (including diversion of management time and rebranding) that can be incurred by not taking sufficient care at the time of selecting your brand that you are not going to infringe anyone else’s brand.

The prevailing approach by courts is to uphold contracts wherever possible. This is often done despite the presence of terms which may be considered unfair to one party.

This was seen in Hittech Contracting Ltd v Lynn (2001) where Hittech brought an action against a former employee to enforce the restraint of trade clause in the contract. The former employee responded stating that the contract should be voidable as “it was procured through the exercise of undue influence, unfair pressure and unconscionable conduct”. However the court held that the former employee was still bound to the contract.

The case below is an interesting example where the court took the opposite approach and held that parties were not bound a contract where the terms were unfair and those parties had been lisled.

ACCC brought an action against a multimedia agency (MIS) for unconscionable conduct and misleading and deceptive conduct, under the Competition and Consumer Act, for misrepresentations made to its customers about advertising services.

MIS is a global company which provides advertising services, specifically electronic screens, in high traffic areas to display advertisements. MIS generates revenue by contracting with small businesses who pay instalments to have their business advertised on the screens. MIS will not install a screen until it has signed up five businesses.

MIS had a standard contract for all of its advertising services. These contained terms and conditions in fine print. Some of the terms and conditions in question were:

The advertiser could not cancel the contract and there would be no cooling off period.

If MIS was delayed in providing the advertising services, then the advertiser would have no recourse against MIS.

MIS could change the location of the advertisement to a location decided by MIS, if the location agreed in the contract was not available or became unsuitable.

The terms also stated that the contract would automatically roll-over after the initial two year period unless the advertiser gave 12 months written notice.

The Issue

MIS salespeople made misleading representations to the customers by failing to draw their attention to the fine print terms and conditions in the contract, which were extremely favourable to MIS. This failure resulted in some of MIS’ customers being misled or deceived due to the unfavourable nature of the terms and conditions in the contract.

The Outcome

The court found MIS to be in contravention of the Act and liable for damages to several customers for unconscionability and misleading and deceptive conduct. The judge reasoned that the contraventions were “sufficiently clear and concise” and it was in the public interest MIS was held liable for the conduct to “establish the foundation for other orders”.

Lessons

If you have a standard contract that you want to deploy –

consider having it reviewed by a lawyer – to mitigate the risk of them being found to be unfair or misleading towards your customers.

consider the training/induction given to your staff who will be getting it signed (if necessary providing a draft sales script) – to mitigate the risk of their conduct misleading prospective customers,

and thus reducing the risk of not only having contracts in place that cannot be enforced but also the risk of reputational damage.

This case involves a dispute about whether there was an effective variation to a loan agreement. It is a timely reminder of ensuring you have a written record of an agreement rather than relying on an oral agreement where the evidence you give about the terms of the agreement may be rejected by the court.

The Facts

Golden Horizon Finance Co (GHF) was suing Financial & Energy Exchange (FEX) for the amount of $3m + interest from an unpaid loan agreement which was due for repayment in December 2013. There were several initial investments from GHF into FEX under the terms of ‘Subscription Agreements’. The ultimate contention is that FEX stated the terms of the loan agreement were varied so that the loan would not have to be repaid unless one of the following events occurred:

a capital raisingby FEX by way of initial public offering (IPO);

the entry of a new investor sufficient to enable FEX to repay the loan;

the return by FEX of funds formally held in escrow; or

the conversion of the loan to equity in FEX at the agreed price of $0.86 per share.

However none of these events had occurred and GHF claimed the total amount of the loan back from FEX.

The Arguments

Express Variation

FEX claimed that there was an express variation of the loan agreement. This allegedly occurred during a meeting and was supported by a witness, Mr Price, who was present. The court however did not accept Mr Price as credible. FEX also claimed that there was an implied variation of the contract which involved an email between Mr Price and Mr Luo which outlined that FEX could not repay without raising additional capital or issuing further shares.

Previously when there were variations made to the loan agreement GHF had received an additional benefit such as bonus shares. GHF argued that if there was an expressed variation then it would be expected there would have been some benefit, as there was not GHF argued no variation was agreed upon. The court accepted this argument.

Estoppel by Convention

FEX argued the notion of estoppel by convention where there is a shared assumption between both parties and the party who relied on the assumption acted to their detriment. FEX argued that GFH knew they couldn’t repay the loan unless one of the above conditions was satisfied and therefore both parties conducted their business on the common assumption that if one of the above condition was not satisfied, the money would not be repaid.

The court also rejected this argument on the basis that FEX did not suffer a detriment based on a common assumption between the two parties.

Outcome

FEX’s argument of both express variation and estoppel by convention was rejected as they could not be corroborated by the witness or events after the alleged date the variation occurred. FEX was ordered to repay the loan, interest owing and the plaintiffs costs.